Working Paper

A dynamic model of export competition, policy coordination and simultaneous currency collapse

Abstract: This paper offers a game-theoretic interpretation of the recent currency crisis in Asia. Specifically, we argue that the 'price wars during booms' logic of Rotemberg and Saloner (1986) can be used to explain the nearly simultaneous devaluation of several Asian currencies during the summer of 1997. The idea is as follows. Since each of these countries relies heavily on exports to the U.S. pressures for competitive devaluations naturally arise. ; We view the historical tendency of these countries to peg to the dollar as a way to avoid these pressures. However, it must be in the self-interest of each country to adhere to its peg, and we argue that an adverse common external the arrangement requires a collective devaluation that reduces the unilateral incentive to devalue, argue that China's 1994 devaluation can be interpreted as this adverse common shock. The novelty of our interpretation is that it views the recent currency crisis as part of a dynamic strategically cooperative equilibrium, as opposed to a single isolated event.

Keywords: Foreign exchange - Law and legislation; Asia; International trade;

Status: Published in Review of International Economics (February, 2001, v. 9, no. 1)

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Pacific Basin Working Paper Series

Publication Date: 1997

Number: 97-08